In today’s world of nu-finance, society perceives central banks to be the all-mighty monetary authority. They have the ability to print currency, set the price of money, and bailout anyone they like without any thought for the consequences. Yet it’s ironic that most people believe major central banks such as the Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China hold all the power just as it’s about to be taken from them.
According to market strategist, Russell Napier, COVID-19 has set in motion a major transition of power from the central bankers to the politicians. To control the economic impacts of the Coronavirus, governments worldwide have introduced bank guarantees, providing emergency loans to businesses and consumers. But rather than the central banks flooding the system with money then banks deciding whether to use it to make loans, politicians have provided a backstop to cover all the bank’s losses if a debtor defaults.
They have embraced this approach because it allows them to spur economic growth and inflation without the need for a central bank. SBA Debt Relief and the CARES act have pumped billions into the US economy. In Spain, the government has expanded its increasingly popular bank guarantee program from €100bn to €150bn. And, in the U.K, bounce back loans, short-term loans up to £50,000 where the lender has a 100% state backing, now equal two-thirds of the government’s bailout scheme. This, however, is just the start.
Slowly but surely, politicians will start to realize the power of interventing directly in the real economy, and how, in the short-term, it could win them votes and popularity. They will begin to understand how they can create more inflation and economic growth by forcing central banks to comply with their every command. It’s a win-win. An increase in economic activity helps curb the recent societal unrest, distracting taxpayers from other taboos such as rising wealt...